How Are FICA Taxes Collected and Used?
This guide explains the mechanics of FICA payroll taxes, clarifying how your contributions are calculated and used to support Social Security and Medicare programs.
The Federal Insurance Contributions Act (FICA) is a U.S. federal payroll tax taken from many workers’ paychecks. FICA is composed of two distinct parts: Social Security and Medicare taxes. These mandatory contributions are the primary funding mechanism for benefits that support retirees, individuals with disabilities, and their families.
The FICA Tax Collection Process
The collection of FICA taxes is a shared responsibility between employees and their employers. For 2025, the Social Security tax rate is 6.2% for the employee and 6.2% for the employer, totaling 12.4%. The Medicare tax rate is 1.45% for both the employee and employer, for a combined total of 2.9%. Employers are responsible for withholding the employee’s share from their wages and remitting both portions to the government.
The Social Security tax has an annual wage base limit, which is the maximum amount of earnings subject to the tax each year. For 2025, this limit is $176,100. An employee will stop paying the Social Security tax once their income for the year exceeds this threshold, and their employer also stops paying their portion. There is no such wage base limit for the Medicare tax, which applies to all of an employee’s covered wages.
Higher-income earners are subject to an Additional Medicare Tax on wages that exceed certain thresholds based on their filing status. The thresholds are $200,000 for single filers, $250,000 for married couples filing jointly, and $125,000 for married individuals filing separately. The additional tax rate is 0.9% and is paid only by the employee, with no employer match. Employers must begin withholding this tax in the pay period that an employee’s wages surpass the $200,000 mark.
Self-employed individuals pay FICA taxes under the Self-Employment Contributions Act (SECA). They are responsible for both the employee and employer portions of the taxes. This amounts to a combined rate of 12.4% for Social Security and 2.9% for Medicare on their net earnings. To account for paying the employer portion, self-employed individuals can deduct one-half of their total SECA tax when calculating their adjusted gross income.
How FICA Funds Are Allocated and Used
FICA tax revenues are allocated to specific trust funds managed by the U.S. Treasury Department. The money is designated exclusively for Social Security and Medicare programs and is not used for general government spending. This separation ensures that the funds are available to pay for the benefits that beneficiaries depend upon.
The Social Security portion of the FICA tax is divided between two distinct funds. The Old-Age and Survivors Insurance (OASI) Trust Fund pays retirement and survivor benefits to retired workers, their spouses and children, and the families of deceased workers. The Disability Insurance (DI) Trust Fund provides income to workers who are unable to work due to a disability, as well as to their eligible family members.
The Medicare portion of the FICA tax is directed into the Hospital Insurance (HI) Trust Fund. This fund is used to finance the benefits provided under Medicare Part A. These benefits primarily cover costs associated with inpatient hospital care, skilled nursing facilities, hospice care, and certain home health care services.
Understanding FICA on Your Tax Documents
For most employees, the Form W-2, Wage and Tax Statement, is the main document for reviewing FICA tax withholdings. This form provides a summary of earnings and taxes withheld for the previous year. Box 4 of the W-2 shows the total amount of Social Security tax withheld, while Box 6 shows the total for Medicare tax.
The W-2 also specifies the amount of your earnings that were subject to these taxes. Box 3, “Social Security wages,” shows the portion of your income subject to the Social Security tax, which will not exceed the annual wage base limit. Box 5, “Medicare wages and tips,” shows the total earnings subject to Medicare tax.
Self-employed individuals manage their FICA obligations using Schedule SE (Form 1040), Self-Employment Tax. This form is filed annually with their personal income tax return, Form 1040. Schedule SE is used to determine the amount of Social Security and Medicare taxes due on their net earnings from self-employment.